Macroeconomics commentary on deflation

Topics: Monetary policy, Inflation, Great Depression Pages: 4 (702 words) Published: January 29, 2015
Commentary 2.
This article is related to the problem of the threat of the deflation in Europe. European economists split up to the two different sides. One says that such low inflation can lead to the deflation, which could destroy economy of the European countries. Another group thinks that there is no need to panic, “…much of the unexpectedly low inflation in the European Union statistics office reported resulted from failing energy prices, not slow growth”, and that nowadays low inflation is not so bad thing “because it creates a buffer against deflation”. Deflation – sustained decrease in the general price level1. Deflation occurs when supply increase or demand decrease. Actually there is a distinction between two causes of deflation: decreases in aggregate demand (AD), which causes “bad” kind of deflation and increases in aggregate supply (SRAS), which are lead to “good” type of deflation.

Decreasing of the AD is caused by Europe suffering from the economic crisis of 2008; it caused disinflation. Actually 0,5% inflation is not far from the deflation. “When price are falling on a broad front, consumers delay major purchases because they expect prices to drop even more. Companies suffer declines in sales and cannot invest or create jobs”. This leads to the increase in cyclical unemployment. As we can see there is obvious effect of the spiral, which is destructive for the economy of country. For example, deflation of the Great Depression during the 1930s that created a deflation spiral2. Also deflation will beat firms and government, because total revenue of firms decreases therefore profit and investments and decreases, and therefore taxes decrease. Moreover deflation affects banks, because interest rates decreases so income from deposits decreases too. Therefore people draw money from their bank accounts. But there is one more argument for the anti-deflation camp. According to their statistics annual increase in prices caused by Easter Bunny...
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